Survivor Benefit Planning

Managing your TSP and alternate investment options after retirement or separation from service.

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rcozby
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Survivor Benefit Planning

Post by rcozby »

With a FEGLI Open Season upon us, it is a good time to consider how life insurance could/should factor into retirement planning. The merits and demerits of FEGLI are covered in a separate thread. The intent of this thread is to provoke discussion on the merits and demerits of electing a survivor benefit upon retirement.

It can be a complicated topic, depending upon whether you're military, CSRS or FERS or a mix of those, how many marriages you have and will have, and other personally unique situations.

I've always considered opting for the full survivor benefit to be the "right" thing to do. Awhile back, there was a thread that noted that the military full survivor benefit has a payback of one year or less, so it should be a no-brainer...right?

Not necessarily. While meeting with my financial advisor recently, my eyes were opened to the notion that, once the beneficiary of a survivor benefit dies, the benefit dies right along with it. And it's not cheap. If you're a FERS retiree, you can leave 50% of your annuity to your beneficiary for a 10% deduction or 25% of your annuity for a 5% deduction. IOW, if your monthly annuity check is $1000, you'll have to pay $100 every month in order to leave your beneficiary $500 a month for every month the beneficiary lives after you die. The payback can be calculated via actuarial tables, adjusted as you like based on genetics, lifestyle, etc. But here's what stuck in my head: once the retiree and the beneficiary die, there is no more benefit for anyone.

Whole life insurance, however, offers some additional options. In the scenario above, you could take the $100 that you would have put into SBP and put it into a whole life policy. Maybe you'd need something like a $75K policy to provide a surviving spouse $500/month for, say, ten years. But if the spouse dies sooner, the remaining funds are available to go to someone else, unlike with SBP.

Each person's situation is different and requires unique analysis. The purpose here is to simply suggest that it's something to think about and discuss with your financial advisor.

If you're interested in learning more, there's a free webinar to be presented this Thursday, 8 Sep 16, at 2:00 pm EST. Simply use the link provided below to register. You may have to copy and paste the link in your browsers address window.

Federal Employee Survivor Benefits Program

This webinar will cover:

* The Importance of Survivor Benefits
* Spousal Survivor Benefits While Employed
* Children's Survivor Benefits
* Spousal Survivor Benefit Elections Made at Retirement
* Resources for additional information for both FERS and CSRS employees/retirees

This presentation is part of the National Institute of Transition Planning (NITP) Free Monthly Webinar Series.

Thursday, September 8th at 2:00 PM ET

Featured Presenter:
Ray Kirk, Ph.D., Federal Benefits Specialist

Register for this event at: http://event.on24.com/wcc/r/1252714/CF1C79C0026B6F6D369F11C0B5296B51

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scotth2010
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Re: Survivor Benefit Planning

Post by scotth2010 »

No annuity check for survivor means no Fed health insurance for the survivor.
Just something else to factor in.

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rcozby
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Re: Survivor Benefit Planning

Post by rcozby »

scotth2010 wrote:No annuity check for survivor means no Fed health insurance for the survivor.
Just something else to factor in.


Indeed. And again, it's complicated. My spouse is also a fed, so we'll keep family coverage under my name until I kick and then she can pick it up under her name, so no SBP needed for that purpose.

crondanet5
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Re: Survivor Benefit Planning

Post by crondanet5 »

rcozby if the beneficiary of the SBP participant lives one year from the date of the participant's death they will recover every penny put in the SBP Program. After that it is pure gravy. I think SBP is a good deal. But as you pointed out there may be additives to your "survivor" package that go beyond simply providing financial support to your designated survivor. That might be a whole life insurance policy that could be rolled into an annuity with full return of premium to support other "survivors" you wish to receive financial support. My friend knows a lot more about this than I do so use what I say as a starting point in your planning. I believe there was a recent change to SBP to put the benefit checks into a trust for a handicapped child but I don't know if they have opened up other programs to pay designees you want to cover.

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Aitrus
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Re: Survivor Benefit Planning

Post by Aitrus »

The only thing I don't like about SBP is if the beneficiary dies before the sponsor. If this happens, then the reduced paycheck is un-reduced and no more deductions come out. However, you're out all the money that you paid for a benefit that was never used. It's like paying for complete car insurance and then never getting into a wreck.

Even considering that, I plan on paying the full SBP. For the cost, I think that life insurance won't be worth it for me. The kids will already be through college, and all debts will be paid off. The only thing might be medical bills, but that's part of what an inheritance is for - so the kids don't get saddled with all the debt for dad's hospital stay. My TSP and FEHP will cover most of that bill when/if it happens.

Instead, whatever I would pay for life insurance in retirement I plan to just reduce by the same amount from my TSP payments (down to IRS minimums after age 70) if needed. Any extra that I don't use for living expenses just gets socked away in liquid cash (or into a trust fund). That way when I die there's more TSP left over for my spouse, or my kids if that happens to be the case. I'd rather leave the extra money in TSP gathering more interest rather than paying it to a life insurance agency who would only invest the money themselves. Buying life insurance would be an opportunity cost for me and mine. Especially when you look at how the premiums start ratcheting up significantly after about age 60 or so, and that's still 24 years away (plenty of time for premiums to rise even more before I start paying them).

Long run, it's just not worth it to me to have a lower income for another lump sum taxed payment later for my wife/kids while missing out on the interest earnings in the meantime. To me, the purpose of life insurance is to replace lost earnings so the family isn't rendered destitute due to an early passing. That's why I have plenty of insurance now, and at good rates, to cover future earnings I would have made. But if I die in retirement that won't be an issue. When I die my wife will still receive payments from the full SBP purchase, plus social security benefits (as my beneficiary, plus her own SSA), plus her own retirement pension (public schoolteacher), plus being my ANG retirement beneficiary, plus anything left in my TSP.

If we both die, then the kids get whatever's left in TSP and the bank accounts, plus the paid off house, cabin, cars and precious metals. That should take care of any bills (if any) with plenty left over.

Everybody will be just fine if I die in retirement without the life insurance.
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rcozby
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Re: Survivor Benefit Planning

Post by rcozby »

Aitrus - great points - if you're thinking of term life. This is why I mention whole life in my original post. Whole life is certainly more expensive, but that's because you get more for it. A list off the top of my head:

- The premiums do not increase, but the benefits can increase due to cash value accrual.
- You can cancel the policy at any time and get the cash value back.
- Your beneficiary is not taxed on the proceeds.
- It's a valuable component of estate planning, i.e. it can pay your estate taxes so your heirs don't have to.
- It's a different resource pool, so enhances diversification of your overall net worth.

And my favorite part about whole life insurance vs. other types of insurance: There is no question that my beneficiaries WILL be able to use it.

Full disclosure: I'm an electrical engineer for the Army and I specialize in testing stuff. I know nothing about financial anything and have certainly have nothing to sell. I was intrigued when my financial advisor (fee for service, CFP, no commissions) explained the above to me, and I bought it - hook, line and sinker.

I will be retiring next spring and bought a whole life policy with a face value equal to my TSP balance. The premiums are factored into my retirement budget and now I am free to spend down my TSP without worrying if I will be able to leave anything for my heirs. It's a nice feeling.

skiehawk11
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Re: Survivor Benefit Planning

Post by skiehawk11 »

rcoxby,

If you don't mind me asking; what is the ballpark monthly figure for whole life insurance? And how long do you have to pay that premium for? And how long have you been paying that premium?

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rcozby
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Re: Survivor Benefit Planning

Post by rcozby »

Skie - $1500, till I'm 100, 1 year. That buys a little over $1M and grows over time.

skiehawk11
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Re: Survivor Benefit Planning

Post by skiehawk11 »

I am actually thinking of a deferred variable annuity from Vanguard (after maxing all tax advantaged accounts).

For instance, a ballpark figure for my age (30) for around 1.5 million dollars is 1,200 a month (assuming 400 per 500k).

For a variable annuity, I'd invest the same amount into the annuity and at age 62, I'd have a balance ranging from 2.0 to 3.5 million dollars.

The only aspect that I see makes sense for whole life for me is if I die before my annuity balance reaches 1.5 million dollars. The payout would be my balance or total contributions (whichever is higher). Seeing as I am still single and have no children, maybe whole life insurance isn't a good thing for me yet.

skiehawk11
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Re: Survivor Benefit Planning

Post by skiehawk11 »

The other option is based off this article on Wealthfront:
https://blog.wealthfront.com/whole-vs-t ... nvestment/

I actually like this idea. Basically, set a term life of 20 years for myself (should be enough time to build up a good amount of capital. The biweekly premium is around 20 dollars (520 a year in premiums) for 750k in coverage from WAEPA. If I invested the difference a month into a taxable account (550 - 40 = 510); in 20 years I'd have a cash balance value of 450k - 600k (Monte Carlo simulation of possible future balance).

There seems to be so many options...

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Aitrus
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Re: Survivor Benefit Planning

Post by Aitrus »

rcozby,

Let me run through some numbers for you so you can see the angle I'm coming from on why I won't buy whole life insurance. Let's say I start paying that plan you have at $1,500 per month when I retire at my planned retirement age of 57.

$1,500 per month = $18,000 per year

$1mil / $18,000 = 55.55 years

57 + 55 = 112


If we go by a straight "Will I get my money back?" comparison, I'd have to live past 112 before paying $1,500 per month for $1mil becomes a bad deal. What are the chances I'll live to 112? Good deal so far.

If I croak at the IRS estimated age of 83, I will have paid:

$18,000 * 26 years = $468,000.

My beneficiaries will get a little more than twice what I paid in. Looks like an even better deal! And this is as far as most people go in deciding if whole life is a good buy or not.

But what about opportunity cost? The money I would have to pay for the insurance I would have to pull from my TSP account, and it won't earn interest because I will have paid it to the insurance company.

To figure out what my opportunity cost would be, let's pretend that I have a $0 TSP balance, and put in $1,500 every month. As time goes on the account will grow, meaning that I'll be "paying" for life insurance each month, and so more money will be lost over time to pay for insurance, and thus the increasing opportunity cost. We'll try a few different calculations with interest as the variable. Let's also assume that I'll croak right when I hit 83, when the IRS estimates I will kick the bucket. That's 26 years of investing.

I'll use the TSP.gov's "How Much Will My Savings Grow" calculator located here: https://www.tsp.gov/PlanningTools/Calculators/howSavingsGrow.html On that calculator, I'll have to pretend that I'm a CSRS employee to simulate no 5% matching, and calculate future contributions only. We'll say that we're investing for 26 years, make a salary of $18,181, have a monthly pay schedule, and contribute 99% of it to TSP (100% isn't allowed on the calculator). 99% of $18,181 = $17,999, so we're as close as we can get to paying $1,500 per month. Also, no pay increase and no catch-up contributions. We'll also set the number of years until we pull the money out to 26 to give us the final cost of paying the $1,500 per month for 26 years. The only variable will be interest.

$1,500 per month, for 26 years, at 2% interest (current G Fund rates) = $611,583
Same as above, but with 4% interest (typical advice for post-retirement assumptions) = $812,092
Same as above, but with 6% interest (F Fund average for the past 28 years) = $1,093,738
Same as above, but with 7% interest (typical advice for pre-retirement assumptions) = $1,275,293
Same as above, but with 8% interest (seasonal mix of "F all year & S in Dec" average for past 28 years) = $1,491,146
Same as above, but with 10% interest (C Fund average for past 28 years) = $2,053,700


Let's go wild and decide that I decide to keep almost all of my TSP funds safe in G, but want to have fun with this $1,500 a month by following Jahbulon's Basic Mix religiously.

Same as above, but with 15% interest (Jahbulon's Basic Mix for past 20 years) = $4,718,992
Same as above but with 12% interest (let's say Jahbulon's doesn't work perfectly, so I average 1% per month instead) = $2,851,663


So the opportunity cost is there if I decide to play it risky with just the money I would pay for the insurance and get anything better the historical bond return of 6%. Keep in mind that all these numbers assume that I die at 83 with 26 years of investing. What if I live to my grandpa's age of 95? And the $1mil payout will be degraded after 26 years due to inflation. Even if the amount grows over time, I wonder if it'll keep up with inflation... And not to mention if the company will still be in business, that tax laws regarding insurance payouts haven't changed, etc.

If by some miracle I die at 112 and have 55 years of investment and leave it all in G the entire time...

$1,500 per month, for 55 years, at 2% interest = $1,790,682

So leaving the money in the G Fund to earn the all-time-low-since-inception of 2% interest gets more than the insurance cash vs payout point of 112 years. And what if I left the money in the F Fund and earned 6% instead...

Since they took my money and invested it themselves, anything above and beyond the payout belongs to the company. The longer I live the more they make. This is why I don't think whole life insurance is worth it, and why I choose not to purchase it.
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rcozby
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Re: Survivor Benefit Planning

Post by rcozby »

This is probably a good time for cron's wife to step in. Variable annuity vs. whole life seems to be a question worth answering. As skie noted, there are so many options...(and even more assumptions)...

- I'm looking to diversify a portion of my retirement savings into a different risk pool. While it's true that I "may" do better by investing the premiums into some mix of the TSP funds, I'm already doing that. I want something I can count on when all goes to hell again and I'm seeing insurance as one way of providing that.

- Most decent whole life policies target their face value IAW recognized amortization tables. If you live beyond that, you can choose to stop paying premiums and keep the current face value or continue to pay premiums and the face value grows, so this will skew the opportunity cost analysis more in favor of the whole life insurance. Perhaps not totally, but some.

- The original point of this post targets the merits of SBP vs. buying your own policy. Lots of research already out there on the merits of different kinds of private policies, but I have not seen a thorough treatise on the merits of private policies vs. SBP. Is this because SBP is, as cron suggests, a slam-dunk, no brainer? Most, if not all of us will be faced with making that decision upon retirement. When I looked at it, it wasn't obvious that it was the best possible option, and my financial advisor ran some numbers indicating that, because it goes to zero when my survivor dies, it's actually a pretty poor option.

Has anyone seen an analysis of the merits of SBP vs. other options?

skiehawk11
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Re: Survivor Benefit Planning

Post by skiehawk11 »

The only other piece of advice to give is to not view insurance as an investment. Insurance and investments are two completely separate things that perform completely separate functions. With that said, I'd definitely recommend running the numbers to make sure, the insurance contract is favorable to you and prices fairly for the risk being mitigated.

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Navig8tor
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Re: Survivor Benefit Planning

Post by Navig8tor »

I don't know what SBP you all are talking about; however, if it is that which is offered upon military retirement, there's NO WAY (unless you die shortly after leaving the military) that your survivor is making back everything you spent "in a year." <<< Cro, we've talked about this in the past.

For military SBP, my monthly premium will be 6.5% ($371/month) of my retirement pay for my wife to receive 55% of my base retirement pay upon my demise. As well, that $371/month payment will have to be paid for 30 years until "paid up" (or I die).

I'll be a few months shy of 50 when I retire in January after a 31+ year military career. My wife will be 48. If I'm lucky enough to live long enough to "pay it up," I will have spent nearly $133,000 in SBP premiums for a 78-year old woman to then take in about $3100/month in payout. It would take her 3.6 years to recoup the $133,000 in pay-in.

You gotta face the cold, hard facts here: Even if she lived to be 100 years old, in addition to my investments, social security (if there is any), and other money we've saved along the way, she'd take in $706K from the SBP up to her dying day. Not trying to disrespect anyone; however, when you're in your 80's, how much money are you REALLY spending?? The fact of the matter is neither of us are probably going to live that long. Based on family history, we'll be very lucky to make it to 85.

So with REAL LIFE in mind, do you work your finances while planning to live to 100, or do you plan more reasonably based on real life events and statistical probability?

I think, for $371/month, there are better life insurance policies out there that would pay out upon my death rather than giving her $3000/month until she passes. What if she passes 2 years after I do...all that money I paid in doesn't go to MY FAMILY...it stays in Uncle Sam's pocket until it pays out on someone else's policy. I'm fairly positive that's not a good ROI.

Real life experience here: My dad paid into SBP for 30 years and died 3 months after his last payment. He retired from the Navy as E-9 in the late-1970's. Told my mother for 30 years she would be getting half of his retirement pay when he died. At the time of his death, his retirement checks were about $2200/month. My mother has been getting a check in the amount of $415 since he passed. I think he was just confused as to what he was paying for all those years (obviously much less than 55% of his retirement pay). She sure was shocked to find out that was all she was getting was $415 in survivor benefits.

I know he didn't do it on purpose; he actually left her quite well off financially. I think he was just misinformed as to what he was getting when he signed the SBP paperwork. I'm not sure what military retirees of the late 1970's were told about SBP on their way out the door...probably the same "mysterious" entitlements and lack of real knowledge that we're told now, 40 years later. These Transition Assistance folks talk up the SBP like it's the best thing available but I don't think it is.
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Aitrus
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Re: Survivor Benefit Planning

Post by Aitrus »

No, we're talking about the civil service FERS SBP. 10% deduction in my retirement pay for a 50% benefit for my wife after I die, or a 5% deduction for a 25% benefit.

Sorry for the confusion, Navig8tor.
Seasonal Musings 2021: viewtopic.php?f=14&t=18757
Recommended Reading: http://tspcenter.com/forums/viewtopic.php?f=14&t=13474
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